Thank You

Error.

David Winters' portfolio holdings change over time, but not his investing approach. The
Wintergreen Fund
(ticker: WGRNX), which he launched in 2005, holds about 30 stocks, with the 10 largest positions accounting for half of its assets.

A global value investor who preaches patience, Winters, 50, is a big believer in the view that thorough stock research provides an edge over the competition. That isn't surprising, considering that he worked for nearly two decades at Mutual Series, the vaunted value shop run by Michael Price and the late Max Heine.

Wintergreen has an annual total return of 7.36% since inception, placing it in the top 12% of its Morningstar peer group. Winters, who is based in New Jersey, but travels frequently to visit companies, journeyed to Manhattan recently for an interview at Barron's offices. The topics ranged from jewelry and watches to some of the stocks he likes. For specifics, read on.

"One of the lessons for us from the 2008 debacle was: Don't own leveraged black boxes." -- David Winters
Ken Schles for Barron's

Barron's: We'll get to some of your holdings shortly, but let's start with your macro view. What concerns you?

Winters: We are very concerned about inflation, particularly the amount of money that has been printed in the West and Japan as the global economy recovers. We already see that food prices have gone up, and so one of the issues that almost no one is talking about is inflation risk.

You have been worried about that for a long time.

Yes. Our timing hasn't been perfect, but we really are focused on trying to find businesses that have pricing power. Even if there is currency depreciation, the businesses that we are investing in should do just fine with inflation. The corollary of it is that we are concerned that, at some point, interest rates go up. Rates have gone one way forever, and at some point they will reverse. So we want to own businesses that are already borrowing long-term and have the ability to do well, even in a higher interest-rate environment. So there are two elephants in the room that no one wants to talk about: inflation and higher rates.

What kind of company can weather this scenario?

We love the watch-and-jewelry business, because it has tremendous pricing power. There is a lot of emotion involved in purchasing a watch or a ring or a necklace. So a lot of the decisions are less based on economics than on love and affection.

The watch business, which we've studied for about 20 years, is really dominated by a couple of players. It is a fabulous business, and it's growing. The runway is as far as the eye can see.

With the stock market having made such big gains recently, is it tougher to find companies to invest in?

Well, business conditions have improved. So, many companies' results are getting better, and their future results should also be improving. And there are some companies we've liked that are a little more complicated, and it is not just about a simple P/E [price-earnings ratio]. In the case of the watch-and-jewelry industry, there is usually a lot of inventory and a lot of free cash flow. But usually, most of the analysts don't look at that. So we still find that there is a tremendous amount to do because, as always, people focus on momentum. Most market players are momentum investors, not long-term investors. But I'm very enthusiastic.

What are your thoughts about the U.S. stock market?

Look, there has been a big rally, so that makes it tougher to find ideas. But there are some wonderful opportunities here in the U.S. It is just that they are more tucked away. This is a securities analyst's market, as opposed to an indexer's market. The U.S. is very fertile. It is a great place to invest in because you've got proper disclosure and proper rule of law, so there is still lots to do in the U.S., especially in U.S. multinationals.

The Wintergreen Fund has a good long-term track record, but last year's 7.5% year trailed that of most of its peers. What's your self-assessment?

We don't own leveraged financials. One of the lessons for us from the 2008 debacle was: Don't own leveraged black boxes because we don't know [what they're doing], and there isn't enough clarity. We also don't own any health care. We basically believe the health-care business has been nationalized, or it's in the process of being nationalized, so these companies are losing their ability to price. We don't own any telecoms, either, because that is also a very tough business. The challenge of being a long-term investor that outperforms is that, at times, you don't outperform.

We've definitely been out of step with the short-term movements of the market, and our conclusion is we don't want to own holdings such as leveraged financials. We try to take almost no risk. It doesn't mean that our securities don't fluctuate. But the underlying businesses of almost all of our companies have very little debt. When people all decide that they want to be in a speculative mood, most of our companies lag.

How about a stock that will do well in this kind of economic environment?

I'll start with
Swatch GroupUHR.VX 1.9162526614620299%Swatch Group AG ADRU.S.: OTCUSD21.54
0.4051.9162526614620299%
/Date(1438381200000-0500)/
Volume (Delayed 15m)
:
79214
P/E Ratio
15.547856214811606Market Cap
23573914786.4509
Dividend Yield
1.8512813370473538% Rev. per Employee
261165More quote details and news »UHR.VXinYour ValueYour ChangeShort position
[UHR.Switzerland], the largest watch company in the world. It is a Swiss company, and it is controlled by the Hayek family; they've done an amazing job. The company was basically a series of very troubled assets that they have turned around. Today, it is a global business, and they have pricing power. They have very good management, and it's not an expensive stock.

Based on what metric?

You have to deduct the inventory and the cash to see what you are really paying for the business. But they also have other businesses. They just bought Harry Winston, which is a turnaround, and the managers at Swatch are among the greatest industrial turnaround artists, certainly in the watch business. So you are paying a very modest forward multiple for one of the great companies in the world.

The stock is near its 52-week high of 562 Swiss francs ($593), and it's had very strong returns in recent years. How sustainable is this business?

It was more comfortable when the price was maybe half what it is today. But the thing is, after all the work we've done on this company and our travels to Asia, you realize it is real estate on the wrist. In a part of the world where people can't have big homes, what they can do is express their individuality. And so these companies are lower-risk ways of participating in what's going on in the Far East and places like Brazil. There is a lot of wealth being created and, for us, the question is: How do we participate without taking a lot of risk? We know there are going to be ups and downs in the watch business. But with a longer-term perspective and recovery in the world economy, companies like Swatch should just keep going.

What's the stock worth?

I don't know the exact answer. The most important thing is that they keep doing what they are doing and if they do it, it will just get more valuable over time. It is a watch company, although they do have a little jewelry with Harry Winston. They sell low-, medium-, and high-end watches, so they can appeal to people at different price points. It is a great business, and there are not that many competitors.

What's your next pick?

Compagnie Financière RichemontCFR.VX 1.6470588235294117%Compagnie Financiere Richemont S.A. ADRU.S.: OTCUSD8.64
0.141.6470588235294117%
/Date(1438381199000-0500)/
Volume (Delayed 15m)
:
1469796AFTER HOURSUSD8.62
-0.02-0.23148148148148148%
Volume (Delayed 15m)
:
P/E Ratio
N/AMarket Cap
49826536730.3465
Dividend Yield
1.7139467592592592% Rev. per Employee
463534More quote details and news »CFR.VXinYour ValueYour ChangeShort position
[CFR.Switzerland] is also in the watch business and based in Switzerland. They own Cartier, the great global jewelry and watch brand. There is no other company that comes close to doing what Cartier does, and they are growing in all parts of the world where there is more money being made.

One of the beauties of the jewelry business is that, even though there is innovation and different things in style, people mostly want what their grandmother had, and a lot of this has to do with emotions. Cartier has been brilliant at creating that kind of connection in people's minds. It is a wonderful company, and it has a franchise that can't be duplicated. Nobody will ever catch up.

What's the valuation?

Richemont has a lot of cash and inventory. If you believe, as I do, that business will continue to improve, the stock trades around 10 to 12 next year's earnings, excluding inventory. You've got a business that's the best in the world. You have business with good or improving economics and you have a growing global middle class joining the party. And then you have a management that owns a lot of stock and really cares. Also, we just don't think the stock is very expensive. And there are certain things we know that are not going to change. We know that people fall in love, people have to buy presents, and it is a universal human truth. Cartier is a brand that has captured that, and they've captured it in a way that enables people where people are willing to spend the money.

How is Richemont valued relative to Swatch?

Swatch is actually a little cheaper, trading at under 10 times forward earnings, compared with 10 to 12 times for Richemont.

Let's leave watches and jewelry for another sector.

OK.
Canadian Natural ResourcesCNQ 0.16433853738701726%Canadian Natural Resources Ltd.U.S.: NYSEUSD24.38
0.040.16433853738701726%
/Date(1438376823078-0500)/
Volume (Delayed 15m)
:
3964855
P/E Ratio
8.8014440433213Market Cap
34927532720.2012
Dividend Yield
3.103659913361333% Rev. per Employee
2285620More quote details and news »CNQinYour ValueYour ChangeShort position
[CNQ.Canada] is a play on oil and natural gas. It is a big oil-sands player. There have been concerns about whether the XL Pipeline [from Canada to the U.S.] gets built. What makes us really excited about the company—I want to jump up and down about CNQ—is when we run the numbers versus where the other comparable Canadian oil and gas companies trade. CNQ shares trade at a big discount. And then if you look at the recent deals that have taken place in Canada—and I'm not suggesting that CNQ is going to get sold—the transactions have been at two-and-a-half or three times the current price for CNQ. And management owns a lot of stock, and they are very dedicated to growing the asset value of the company through exploration and acquisitions. So, it is a value investor's dream.

The stock trades at a massive discount to net asset value. You have a management that wants to do what's right and has done pretty much what's right, and the NAV has grown. So as a holder of the stock, you can sit there at a big discount to NAV, and every day you have a little more oil and gas in your shareholder barrel. And we like very much that the oil is in Alberta. We don't have to worry about waking up in some far-off land that has decided that the oil or gas that you thought you owned is now owned by the state. So the stock is super-undervalued and, fortunately, it is close by in a country that loves us, Canada. The stock was at around C$32 recently.

What's going to drive the growth from here?

They could develop more wells. They could do more acquisitions. Then there is the question of what happens to the price of oil, which is controversial because there's a growing supply of shale oil and gas. But in our travels, we see more and more people around the world who want cars, scooters, motorcycles, and air conditioning. They want all the stuff we have. So the future of fossil fuels is bright, and CNQ—although the stock has done basically nothing for quite some time—is a wonderful way to participate in a consumer society.

Yes, last June we sold Wynn Resorts, the parent of Wynn Macau, when it became more apparent how moribund Las Vegas was going to be. They took public their Wynn Macau piece and, in our humble opinion, Wynn Macau is the most interesting piece of the puzzle. Wynn Resorts owns more than 70% of Wynn Macau. Macau is the largest gaming market in the world, and Steve Wynn is a brilliant builder. So we just decided to swap out of the parent company and get into the subsidiary.

Because it was a better opportunity?

The dynamics of Macau are so compelling, and the Chinese so love Macau. It's like nothing you have ever seen; it is a bit like Las Vegas moves to China.

What do you get with Wynn Macau?

They have their casino and hotel, which they make an enormous amount of money from: roughly $1 billion a year. It is stunning how profitable this thing is, and it is the most opulent of any property in Macau. It is a VIP-type property. And then there is something called the Cotai Strip, which is also in Macau, and Wynn Macau owns about 50 acres there, where the company is going to develop a spectacular $4 billion-plus resort.

Is that near the existing hotel?

It's 10 or 15 minutes away. So, again, it is a bit of a bet on Steve Wynn and his ability. But we've studied Steve Wynn's work over the past 40 years, and the guy is a winner. So, give or take, you pay for today's property and when the Cotai Strip property opens in a couple of years, you could double your money from here. We love this company.

They've been putting a lot of their cash into capital outlays, presumably to fund more growth.

Correct, and they could pretty much self-fund this Cotai Strip project. They will borrow some money to do it, and it will probably end up costing more than they think, because they always want to make it more spectacular. But Steve Wynn is amazing, and Macau is a great market.